PERSON OF THE WEEK: With home prices reaching record highs in the first quarter of 2022, U.S. homeowners have realized significant home equity gains. Now, community lenders need to stand ready to help homeowners tap into that equity to help them meet their future needs.
But just how big is the opportunity for community lenders offering home equity loans? To find out, MortgageOrb recently interviewed Allen Jingst, chief revenue officer for LenderClose.
Q: You predict that 2022 will be an unprecedented year for home equity lending. Why is that?
Jingst: The early months of 2022 are a bit of a crossroads for lenders as they see the historic low-rate refi boom more visible in the rear-view mirror than on the horizon. In the not-so-distant future, they are faced with some strong headwinds: increasing rates, housing shortages, auto shortages and record homeowners who recently refinanced or purchased a home.
While the challenges may be mounting, at the same time, Black Knight recently reported that tappable home equity hit a record high of $9.4 trillion in the third quarter of 2021. As rates increase, so will the interest on credit cards and other debt, offering homeowners a way to capitalize on home equity to restructure debt or a lower rate option to turn equity into income they need in 2022.
Q: How can community lenders expand their lending options to meet the needs of the current market?
Jingst: Because community lenders had a physical presence, they previously had an advantage over competing fintechs. However, this is no longer enough. There are fintechs that are competing with FIs by using technology to meet borrowers not just where they live but where they spend time: online.
To test this, search “home equity loan in [your city]” and see what company shows up at the top of the list; it’s probably not a community lender. Furthermore, fintechs are also using platforms like Instagram, TikTok and Pinterest to reach homeowners who have moved beyond making financial decisions based on which bank has a branch down the street from them.
Some leaders from community lenders hesitate to advertise because they are short-staffed and are not sure they can handle the additional volume of applications while offering the right borrower experience. This is where identifying fintechs that can help and leveraging them is crucial to scaling in the digital-first world. There are a lot of credit union service organizations (CUSOs) and tech companies focused on credit unions and community banks with a goal to equip them with the tools and tech they need to build their community presence and meet the needs of the entire current market not just the people who want to go to a branch.
Q: What do you think have been some reasons financial institutions have opted not to offer home equity loans until now?
Jingst: Many FIs made infrastructural changes during the last 18 to 24 months that placed home equity lending under their mortgage department to reallocate staff to focus on the increased number of refinancing requests. As a result, home equity loans took longer than previous years to complete, because they were processed the same way as a refinance. This led to lower home equity loan volume and reduced borrower satisfaction.
As market conditions are changing, so are FIs’ views on home equity. They are separating home equity lending back into an independent department, focusing on technology and service upgrades to equip staff with better resources to speed up the process and offer a better borrower experience. FIs are also feeling increased pressure from competing fintechs that are not bound by branches and geographic borders. In the coming years, they must focus on pursuing current and potential borrowers with new and innovative, digital-first technology.
Q: What needs to happen for financial institutions to embrace home equity lending?
Jingst: It starts at the top. If the leadership team is challenging the rest of the organization to look at options like home equity loans to help borrowers, set clear goals for the team and teach the front-line staff to be able to ask a question, they will be surprised to see what can happen. For community lenders, only 4% of customers on average have a real estate loan with that financial institution. That is a problem, and until leaders see this as a problem and take the necessary steps to change this across their organization, borrowers will continue to look elsewhere for help.
Q: What should leaders do if they want to expand home equity loan offerings in their FI?
Jingst: The first step is to know what expanding home equity lending means. When we sit down with lenders, many are surprised to see where they rank in comparison to peers in terms of total home equity portfolio strength, loan conversion ratio, average time to close and borrower satisfaction. Getting a fresh perspective on what is possible can reveal opportunities that may not have been obvious.
Once management understands the FI’s current standing, there are many ways to help implement new technologies, products, processes and ways of thinking that can help them attract new borrowers, close more loans and increase their portfolio without having to add staff or cause disruptive changes. It’s really a constant cycle of knowing then growing. Having the right partner to help you see what is possible is critical to ongoing improvement in your home equity lending process and offerings.
Q: How do you think the industry as a whole will approach home equity lending moving forward?
Jingst: During a recent NFL football game, there was commercial from a large online lender that had mostly focused on home purchase and home refi. However, this commercial was entirely focused on home equity lending.
I believe large banks will once again start offering and promoting HE loans as rates and equity continue to increase. I also believe competing fintechs will continue to expand into areas previously owned by community lenders, and they will not be building branches. They will focus on meeting borrowers where they spend time and focus on offering a better experience that meets the evolving expectations of more demanding and savvy borrowers.